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Margin pressures
Despite a reasonable continuing business sales growth (22%), Biocon’s operating
profit growth was weak (3%) primarily due to lower operating margins. We
incorporate some improvement in margins for the rest of the year considering a
favourable currency. Biocon trades at pricey multiples for a largely commodity
business. We do not see material upside to the stock.
Reasonable sales growth
�� Biocon’s net sales were marginally higher than our expectations at Rs5.1bn
representing a decline of 25% YoY. Excluding Axicorp (the divested business),
continuing business growth was strong at 22.5%YoY.
�� Biopharmaceuticals business grew 21% YoY with branded domestic formulations
growing 35%. A large part of biopharma business is still API exports and benefits
from rupee weakening. Hence, one can expect good numbers over coming
quarters.
�� Contract research business continued to report strong growth considering a low
base last year (same quarter last year it grew 7% YoY). However, beginning
4QFY12, a high base could result in some moderation in growth in this segment
unless we see some new contracts coming in.
Operating margins under pressure
�� Ebitda margins declined 102bps QoQ due to a sharp rise in R&D expenditure
(largely related to insulin deal with Pfizer).
�� Excluding impact of divested business, Ebitda grew 9% YoY (while the reported
Ebitda shows a decline of 7.2% YoY).
�� Reported profits declined 4.2% YoY to Rs857m as against our expectation of
Rs877m.
�� Going forward, as the licensing income increases, the company expects R&D costs
to go up to 7-8% of revenues.
Back ended earnings
�� Lack of near term triggers and back ended earnings limit stock performance. We
believe earnings from biosimilars pipeline are quite back ended.
�� We have lowered our earnings estimates based on a lower margin assumption
despite a favourable currency for rest of the year.
�� Biocon trades at pricey multiples for a largely commodity business. We do not see
material upside to the stock. We prefer formulation players (Cadila) that are
trading at similar multiples and Torrent/IPCA that are trading at discount.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Margin pressures
Despite a reasonable continuing business sales growth (22%), Biocon’s operating
profit growth was weak (3%) primarily due to lower operating margins. We
incorporate some improvement in margins for the rest of the year considering a
favourable currency. Biocon trades at pricey multiples for a largely commodity
business. We do not see material upside to the stock.
Reasonable sales growth
�� Biocon’s net sales were marginally higher than our expectations at Rs5.1bn
representing a decline of 25% YoY. Excluding Axicorp (the divested business),
continuing business growth was strong at 22.5%YoY.
�� Biopharmaceuticals business grew 21% YoY with branded domestic formulations
growing 35%. A large part of biopharma business is still API exports and benefits
from rupee weakening. Hence, one can expect good numbers over coming
quarters.
�� Contract research business continued to report strong growth considering a low
base last year (same quarter last year it grew 7% YoY). However, beginning
4QFY12, a high base could result in some moderation in growth in this segment
unless we see some new contracts coming in.
Operating margins under pressure
�� Ebitda margins declined 102bps QoQ due to a sharp rise in R&D expenditure
(largely related to insulin deal with Pfizer).
�� Excluding impact of divested business, Ebitda grew 9% YoY (while the reported
Ebitda shows a decline of 7.2% YoY).
�� Reported profits declined 4.2% YoY to Rs857m as against our expectation of
Rs877m.
�� Going forward, as the licensing income increases, the company expects R&D costs
to go up to 7-8% of revenues.
Back ended earnings
�� Lack of near term triggers and back ended earnings limit stock performance. We
believe earnings from biosimilars pipeline are quite back ended.
�� We have lowered our earnings estimates based on a lower margin assumption
despite a favourable currency for rest of the year.
�� Biocon trades at pricey multiples for a largely commodity business. We do not see
material upside to the stock. We prefer formulation players (Cadila) that are
trading at similar multiples and Torrent/IPCA that are trading at discount.
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